On 01 February 2017, Paul Ltd acquired 720,000 ordinary shares of Sam Ltd and as a...

 

 

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On 01 February 2017, Paul Ltd acquired 720,000 ordinary shares of Sam Ltd and as a result Paul Ltd holds 80% shares in Sam Ltd. The purchase consideration was as follows: • Cash paid $ 550,000 • A deferred cash settlement to be paid in five years' time of $ 400,000 • By an exchange of two shares in Paul Ltd for every five shares in Sam Ltd. The market price of Paul Ltd share at the date of acquisition was $7 and the market price of each Sam Ltd share at the date of acquisition was $4.25. The par value of Paul Ltd's ordinary shares is $ 0.75 each whilst the par value of each ordinary share for Sam Ltd is $ 0.5. Legal fees associated with the acquisition were $ 12,500. The discount rate of Paul Ltd is 12 %. (a) Calculate the fair value consideration transferred to acquire control of Sam Ltd. Your answer should include a brief explanation if any of the above issue(s) is/are not required to be accounted in your working(s). [8 Marks] On the acquisition date, the retained earnings and revaluation reserve of Sam Ltd stood at $ 50,000 and $5,000 respectively. Sam Ltd holds a patent which has not been recognized in its financial statements. Paul Ltd's directors were of the opinion that the patent should be accounted and same has been confirmed by the Group Accountant and External Auditor. The patent had a fair value of $ 125,000 at the acquisition date and a remaining term four years to go as from the date of acquisition. The carrying value of Plant was in excess by $ 50,000 on the acquisition date. The group's policy is to depreciate Plant on a reducing balance basis by 10%. Included within the intangible assets of Sam Ltd (at time of acquisition and reporting) is goodwill of $5,000 which arose on the purchase of the trade and assets of a sole-trader business. At the time of acquisition, the directors of Paul Ltd wish to close one of the divisions of Sam Ltd. They estimate that this will cost $ 200,000 in redundancy payments. (b) Calculate the net assets of Sam Ltd at the date of acquisition and at the date of reporting. Your answer should include a brief discussion for the items of goodwill and redundancy payments. [13 Marks] The group policy is to use the fair value method. Goodwill has been impaired by $ 25,000 as at 31 January 2020. (c) Calculate the goodwill at the date of acquisition. (d) Calculate the non-controlling interest at the reporting date. Paul Ltd has recently appointed an accountant, Mr J. Smith, following the resignation of the previous group accountant. When Mr. J. Smith was preparing the group accounts for the year ended 31 January 2020, he found that only the cash consideration of $ 550,000 has been accounted. The extract of the statements of financial position for the year ended 31 January 2020 is as shown hereunder: [3 Marks] [3 Marks] Extract of statements of financial position for the year ended 31 January 2020 Equity and liabilities Share capital Share premium Retained earnings Revaluation reserve Non current liabilities Current liabilities Paul Ltd $ 500,000 300,000 800,000 10,000 125,000 Sam Ltd $ 450,000 150,000 200,000 25,000 50,000 100,000 10,000 (e) Prepare an extract of equity and liabilities section of the consolidated statement of financial position as at 31 January 2020 (showing clearly how the deferred payment and shares exchange should be accounted). [11 Marks] On 01 February 2017, Paul Ltd acquired 720,000 ordinary shares of Sam Ltd and as a result Paul Ltd holds 80% shares in Sam Ltd. The purchase consideration was as follows: • Cash paid $ 550,000 • A deferred cash settlement to be paid in five years' time of $ 400,000 • By an exchange of two shares in Paul Ltd for every five shares in Sam Ltd. The market price of Paul Ltd share at the date of acquisition was $7 and the market price of each Sam Ltd share at the date of acquisition was $4.25. The par value of Paul Ltd's ordinary shares is $ 0.75 each whilst the par value of each ordinary share for Sam Ltd is $ 0.5. Legal fees associated with the acquisition were $ 12,500. The discount rate of Paul Ltd is 12 %. (a) Calculate the fair value consideration transferred to acquire control of Sam Ltd. Your answer should include a brief explanation if any of the above issue(s) is/are not required to be accounted in your working(s). [8 Marks] On the acquisition date, the retained earnings and revaluation reserve of Sam Ltd stood at $ 50,000 and $5,000 respectively. Sam Ltd holds a patent which has not been recognized in its financial statements. Paul Ltd's directors were of the opinion that the patent should be accounted and same has been confirmed by the Group Accountant and External Auditor. The patent had a fair value of $ 125,000 at the acquisition date and a remaining term four years to go as from the date of acquisition. The carrying value of Plant was in excess by $ 50,000 on the acquisition date. The group's policy is to depreciate Plant on a reducing balance basis by 10%. Included within the intangible assets of Sam Ltd (at time of acquisition and reporting) is goodwill of $5,000 which arose on the purchase of the trade and assets of a sole-trader business. At the time of acquisition, the directors of Paul Ltd wish to close one of the divisions of Sam Ltd. They estimate that this will cost $ 200,000 in redundancy payments. (b) Calculate the net assets of Sam Ltd at the date of acquisition and at the date of reporting. Your answer should include a brief discussion for the items of goodwill and redundancy payments. [13 Marks] The group policy is to use the fair value method. Goodwill has been impaired by $ 25,000 as at 31 January 2020. (c) Calculate the goodwill at the date of acquisition. (d) Calculate the non-controlling interest at the reporting date. Paul Ltd has recently appointed an accountant, Mr J. Smith, following the resignation of the previous group accountant. When Mr. J. Smith was preparing the group accounts for the year ended 31 January 2020, he found that only the cash consideration of $ 550,000 has been accounted. The extract of the statements of financial position for the year ended 31 January 2020 is as shown hereunder: [3 Marks] [3 Marks] Extract of statements of financial position for the year ended 31 January 2020 Equity and liabilities Share capital Share premium Retained earnings Revaluation reserve Non current liabilities Current liabilities Paul Ltd $ 500,000 300,000 800,000 10,000 125,000 Sam Ltd $ 450,000 150,000 200,000 25,000 50,000 100,000 10,000 (e) Prepare an extract of equity and liabilities section of the consolidated statement of financial position as at 31 January 2020 (showing clearly how the deferred payment and shares exchange should be accounted). [11 Marks]

Answer rating: 100% (QA)

a To calculate the fair value consideration transferred to acquire control of Sam Ltd we need to consider the different components of the purchase consideration and their fair values 1 Cash paid 55000... View the full answer